Friday, November 30, 2012

Over 70 million adults in
the U.S.
do not have a credit score or have a very limited credit history. Individuals
and families living with limited credit files are forced to take advantage of
alternative financial sources to cash their checks or get temporary short term loans
aka Pay Day Loans. Users of alternative financial sources generally pay very
high costs in relation to the usual transactions you might perform at your
credit union. Cashing a paycheck could cost $3 - $15. A two week $200 payday
loan could cost as much as $45 if paid on time. If the loan cannot be paid off
right away, it has to be renewed. In California,
that means the loan principle and interest has to be paid and a new loan
created. How many times will a person have to pay $45 to maintain and renew the
loan until they can afford to pay it off completely?

Several companies have
created alternative credit scoring products based on the analysis of
non-traditional data, including rental and bill payment history, insurance
payments, debit-card use and public records.They are trying to use this data to predict the payment history of
people who don’t have access to traditional credit products that can be tracked
through a FICO score.

That is basically what a
credit reporting bureau does for people with their credit. It reports the usage
of the various forms of credit a person has and tracks the payments made and
balances carried. Through a computer algorithm it creates a number that can
predict, with fair certainty, the future payment history of an applicant. Those
with FICO scores over 740 are more likely to make their payments on time and
manage their outstanding balances better than someone with a score of less than
740.

Why do some people want to use alternative credit
data? There is a profit motive as vendors can sell more products and services
if there is a universe of more qualified buyers. It could also help families
struggling with traditional credit by showing their propensity to pay their
rent, utility bills, auto insurance, and other regular payments. By using
alternative data, lenders stand to reach a large group of potential borrowers
about whom they currently have little or no information. For these consumers,
alternative credit scores strengthen lenders’ ability to:

-Reliably rank order
risk;

-Efficiently evaluate
applicants for credit or design offers for credit;

-Increase approval rates
while controlling for acceptable levels of risk

Meriwest works
exclusively with Experian Credit Bureau. Experian offers various forms of
credit reports. We use three specifically:

-For
all auto lending, direct lending to our members and through the Credit Union Direct
Lending (CUDL) Network we use the FICO Auto 2 score. This is provided by
Experian, and is a variation of the basic FICO score – more heavily weighted to
the existence and performance on previous auto loans compared to the
traditional FICO score. This is similar to the “Auto Industry Option
Scores” listed below.

-For
our other consumer loans, we use a custom score from Experian called a “Fast
Start” score. It is based on credit and personal characteristics such as
their time on the job, how long they have been a member, and other data.

-We
also look at the Experian BK (Bankruptcy) score. This is a predictor of
the applicants likelihood of filing (or needing to file) bankruptcy, and is
used as a risk measurement in our analysis.

We don’t use
alternative scores, but do tend to look at our borrowers differently than a
traditional bank. In a traditional commercial bank, credit score lending is
King. If they are looking for a FICO score of 740 or above and that’s where you
score, your application has a preliminary approval pending review of debt and
income. If your FICO Score comes in less than 740, your application will be
declined due to credit. They will take no further action on your behalf outside
of sending you the decline letter.

Credit unions,
in general, take a more holistic view of their borrowers. Sure, the FICO score
is an important part of the loan qualification. Credit Unions would like to see
a 740 FICO Score just like the big banks. But if you miss the score by this
much (thumb and forefinger showing an inch), you may still qualify for a loan
at a credit union. Why? They look at the whole person, not just their credit
score. They look at how long you have been employed in the same business or the
same employer. How long have you lived in the area? Or at the same home? How
long have you been a member of the Credit Union? Have you borrowed from them
before? All of these questions go into making the credit decisions. I am not
saying that everyone with a less than 740 FICO Score gets a loan. But, if
someone misses the target score by ten or twenty points, it is not the end of
the loan. Credit Unions can take these questions into consideration and
possibly make the loan for them at a slightly higher rate. This is called, Risk
Based Pricing. If there is increased risk in lending to someone, say a 720 vs.
a 740 FICO Score, we can price our interest rate a little higher accordingly to
offset the risk.

Here is a run down of the
more common credit scores and alternatives to credit scores:

FICO Score: Created by the
Fair Isaac Corporation, FICO is the best-known credit scoring system in the United States.
It is a way of measuring an individual's creditworthiness. A FICO score is a
quantification of a variety of factors in an individual's background, including
a history of default, the current amount of debt, and the length of time that
the individual has made purchases on credit. A FICO score ranges between 300
and 850. The higher the score, the more likely that individual will pay their
bills in a timely manner.

Vantage Score: A consumer credit rating product developed by three
credit rating agencies - Equifax, TransUnion and Experian - as an alternative
to the FICO Score. VantageScore uses a different rating scale (501 to 990) than
FICO (300 to 850), and is branded as a score that provides lending institutions
and banks information related to sub-prime financing. The score is
calculated through a weighted average of a consumer's available credit, recent
credit, payment history, credit utilization, depth of credit and credit balances.

Auto Industry Option Scores: Auto
lenders are unlike other kinds of creditors. Many other creditors look at the
entire credit picture to make a decision. However, some auto
lenders base their decision solely on how previous auto loans were managed. So,
even if your credit scores are bad, if you never missed a car or truck payment
or sent one in late, your Auto Industry scores will most likely be higher than
the standard FICO scores.

Veritas (by Digital Risk):
Most recent alternative; used for home mortgage credit analysis. It Integrates
borrower credit characteristics with property and local real estate market data
along with proprietary behavioral prediction models.

Monday, November 19, 2012

Is your FICO score a mystery to you? Don’t feel bad, most
American consumers don’t know their FICO score much less how it is determined.
Generally, your FICO score can vary from 300 at the lowest to a high of 900. People
ask me, “Hey, Credit Union Guy, what’s a good credit score?” Today, a good
score would be in the neighborhood of 740. At this level you can access good
rates on car loans, home financing, and credit cards. Go below 740 and you may
find yourself paying higher rates of interest on your loans and credit cards.

“What is a FICO?”
FICO is an acronym for the Fair Isaac Company; the company that invented the
calculations that result in a measurement of credit risk. The score is determined
by an algorithm. In a sense, it is a highly complex algebra problem that takes
into account your payment history, the ratio of your loan and card balances vs.
your available balances, the length of your credit history, your credit request
inquiries and the types of credit you are managing. The formula for exactly how
the score is calculated is proprietary information and owned by Fair Isaac.

“Why does the FICO
score exist?” In the old days of lending, loan managers looked at the physical
credit report for a person and made a judgment call on the risk involved with
making a loan to that person. Back then, two loan underwriters might look at
the same report and have very different opinions on the applicant’s payment
history. Credit Scoring took the judgment call out of the process. A person
either scored well or they didn’t. Another reason for FICO score is volume. As
our population grew and more people started using banks and credit unions, the
loan volume increased significantly. In order to speed the loan process, the
FICO score was used. Loan processors can input a minimum of data and get a
score for a credit decision rather than reviewing the entire credit report.

Here is an
approximate breakdown of how it is determined:

·35 percent of the score is based on your payment history. This makes
sense since one of the primary reasons a lender wants to see the score is to
find out if (and how timely) you pay your bills. The score is affected by how
many bills have been paid late, how many were sent out for collection, any
bankruptcies, etc. When these things happened also comes into play. The
more recent, the worse it will be for your overall score.

·30 percent of the score is based on outstanding debt. How much do you
owe on car or home loans? How many credit cards do you have
that are at their credit limits? The more cards you have that have maxed out
lines, the lower your score will be. The rule of thumb is to keep your card
balances at 30% or less of their limits.

·15 percent of the score is based on the length of time you've had
credit. The longer you've had established credit, the better it is for your
overall credit score. Why? Because more information about your past payment
history gives a more accurate prediction of your future actions.

·10 percent of the score is based on the number of inquiries on your
report. If you've applied for a lot of credit cards or loans, you will have a
lot of inquiries on your credit report. These are bad for your score because
they indicate that you may be in some kind of financial trouble or may be
taking on a lot of debt (even if you haven't used the cards or gotten the
loans). The more recent these inquiries are the worse for your credit score.
FICO scores only count inquiries from the past year.

·10 percent of the score is based on the types of credit you have. The
number of loans and available credit from credit cards you have makes a
difference; installment loans vs. revolving lines of credit. There is no magic
number or combination of types of accounts that you shouldn't have. These
actually come more into play if there isn't as much other information on your
credit report on which to base the credit decision.

The next Meriwest Credit Union Financial Education Workshop will be our Reality Based Budgets Workshop for teens and college students on Wednesday, Nov. 28th at our Monta Loma Financial Center in Mountain View. This workshop takes through a post college money management simulation where they are given a salary, rent, car payments, and other bills and build their living budget.

Our Monta Loma Financial Center is located at the corner of Rengstorff and Middlefield Road in the Monta Loma Shopping Center. The program begins at 6pm. We hope you can join us. Please RSVP at our Events Link.

Friday, November 2, 2012

You have
waited a long time. You worked your way through a recession. Perhaps you have
watched your home lose value and slowly regain some it back as our economy has
shown signs of improvement. The time has come for you to do some work on your
house that has been put off too long.

Renovating
the bathrooms and the kitchen in your home can give you some good bang for your
buck when it comes to increasing the value of your home. How do we pay for it?
One of the best ways is to use your home’s equity to finance that improvement.
A Home Equity Line of Credit can be your ticket to a new kitchen. You may be able to deduct the interest on your taxes (check with your tax consultant).

Here at Meriwest
Credit Union, lines up to $250,000 have no application fees nor do they have
any third party fees like title costs. Also, interest rates are at their lowest
point in years, meaning you can save a lot of money in interest charges. Check
our Home
Equity Line of Credit Page or contact your local Meriwest Credit Union
Financial Services Representative for details. Now let's talk about unlicensed contractors.

Beware
of Unlicensed Contractors

It is
about this time of year when someone with a pickup truck and a smile may knock
on your door, mention something about your house that may need work, and
they'll offer to do it at a cost that seems almost too good to be true.

Frequently,
they'll tell you they were working in the area anyway, which is part of why the
job will be so cheap. But it pays to do a bit of research. Here's why:

Liability. Legitimate businesses carry two kinds of insurance that
protects both themselves and you, the customer...

Liability insurance. If
the contractor or his employees cause damage to your property, or a
neighbor's property, they will generally carry insurance or have posted a
bond to ensure that they can make good on any damages. Sure, you can file
a lawsuit and maybe win a judgment. But having a judgment and collecting
on it are two different things. A licensed contractor will generally have
enough insurance coverage to ensure you will be made whole in case of any
kind of claim.

Workers compensation.
Unlicensed contractors typically don't provide workers compensation
coverage to their workers. Most states require this coverage, which covers
any medical costs incurred by workers injured on the job, as well as some
disability benefits. If a worker gets injured on the job, and this
insurance isn't in place, that worker could sue both the employer and you,
the property owner, for damages.

Jail
time. It's true: In some jurisdictions,
using unlicensed contractors not only jeopardizes your own finances - it's
actually a crime.

Scams. Most unlicensed contractors mean to actually do the work.
But one common scam goes like this: The scammer will begin work, then asks you
for money "to go buy some of the materials they need." Then you give
the contractor the money, and you never see them again. Or there may be an
injury, for which you as the property owner are expected to provide
compensation. The injury could be legit... or it could be part of the scam.

Worse
yet, unscrupulous contractors could begin work, tear your roof open, for
example, and then demand much more money than agreed upon to close the roof.
Had you used a legitimate contractor, you would have recourse to your state
licensing boards for unethical work or breaches of contract. Legitimate
contractors don't want to lose their license, so they will work very hard to
satisfy you as a customer and prevent racking up a track record of complaints.

How
to Avoid Them

·The simplest thing to do is ask for their license number. If they can't give it to you, or claim to be "working
under someone else's license," then don't let them touch a thing.

·Also, ensure the contractor gets a permit for any construction projects or anything that involves
digging. Legitimate contractors will normally arrange for the permits
themselves.

oIf they ask you to get the permit, consider that a red
flag. It may be they are no longer welcome at the permit office - or they don't
have the cash to get a permit. Either way, it doesn't bode well.

·Ask for references in your area. If the contractor has a good reputation and has provided
good value and service to his customers, the contractor will be happy to share
his or her references with you. No references? No Job!

·Don’t forget to check social media like Yelp or traditional rating agencies like the Better
Business Bureau. Look for a contractor with good Yelp ratings and no complaints
filed at the BBB. That will make your decision a lot easier!

The
Bottom Line

Using
licensed contractors is a smart move in many ways: It encourages and supports
the legitimate, law-abiding businesses in your community. You can generally
expect a better quality of work. It encourages employment in your community, as
unlicensed contractors are more prone to hire illegal workers. And it protects
you against unwanted liability when things don't go as planned. You could be
liable if an unlicensed contractor or one of his workers is injured on your
property. Licensed, legitimate contractors will have Workman’s Compensation
Insurance for him and his crew. In this case, you would not be liable for
injuries incurred in the performance of the work on your property.